Consumer Behaviour and Demand: Utility, Indifference Curves and Elasticity
This domain tests how a consumer with limited income reaches equilibrium, first through utility (cardinal) analysis and then through indifference curves (ordinal), and how that equilibrium produces the downward-sloping demand curve and its elasticity.
Utility approach
Total utility (TU) is satisfaction from all units consumed; marginal utility (MU) is the addition from one more unit, MU = ΔTU/ΔQ. The law of diminishing marginal utility says MU falls as consumption rises, which is why demand curves slope downward. TU is maximum where MU = 0; MU can become negative. With one good the consumer is in equilibrium when MUx = Px (MU of money taken as 1); with two goods when MUx/Px = MUy/Py = MUm.
Indifference curve approach
An indifference curve shows bundles giving equal satisfaction. It is downward sloping, convex to the origin (diminishing MRS), a higher curve is preferred, and two curves never intersect. The budget line is PxX + PyY = M, with slope −Px/Py. The optimum is where the budget line touches the highest attainable indifference curve: MRSxy = Px/Py.
Demand and elasticity
The law of demand: other things equal, quantity demanded falls as price rises. Own-price changes move the consumer along the curve; income, tastes and prices of related goods shift it. Ed = (% change in quantity) ÷ (% change in price); demand is elastic if Ed > 1.
Worked example
Price is ₹4 and MU in rupees is 10, 8, 6, 4, 2 for units 1–5. The consumer buys up to the unit where MU = price, i.e. 4 units (MU = ₹4). TU = 28, expenditure = 16, consumer surplus = ₹12.
Traps
TU can rise while MU falls - a falling MU is not falling satisfaction. Intersection of an indifference curve with the budget line is not the optimum; tangency is. In the total outlay test, a price fall that raises total expenditure means demand is elastic.